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Disinvestment of state-run firms gathers steam

Commentary: Stake sales in state-run firms would boost government finances, but path won't be easy

By

V.Phani Kumar

HONG KONG (MarketWatch) -- A jumbo council of 79 ministers has just taken charge of India's affairs, riding a mountain of expectations. But nothing will prove to investors that the government is indeed on the path of economic reform than its pursuit of disinvestment.

In a democratic country with elements of a socialist mindset, where outright privatization of state-run enterprises or selling down stakes in them is often equated with the disposal of family silver and the shame associated with it, the process won't be easy.

The investment community's hopes that the government will augment its finances via stake sales in state-owned companies were bolstered last week when Prime Minister Manmohan Singh reportedly said "fiscal prudence and disinvestment" will be addressed in the upcoming budget.

Energy producer Oil India and hydro-power producer NHPC -- both unlisted -- are seen as two of the first candidates if and when the government kick-starts the disinvestment program by selling minority stakes through initial public offerings. The previous United Progressive Alliance government's Cabinet had approved stake sales in the two companies, but never went through with the plan amid weak market conditions.

Centrum Research's economist Dhananjay Sinha recently wrote in a report that a successful execution of disinvestment, by paring the state's stake to 65% from current levels in just seven key companies, could net the government as much as 1.3 trillion rupees ($27 billion).

A Kotak Securities report says it may be possible for the government to raise, over a three-year period, as much as 700 billion rupees from stake sales in listed state-run companies, and another 100 billion rupees from stake sales in unlisted firms.

The figures mentioned clearly suggest the amount the government could potentially raise from disinvestment is quite substantial, and significantly higher than any other Indian government has raised through this route in the past. The timing also couldn't be better, given the sharp rally in Indian and global equities over the past three months, as well as the ample liquidity in the markets.

Still, disinvestment won't be a cakewalk, nor will it be a panacea for India's economic difficulties.

For one, disinvestment at state enterprises has in the past run into opposition from unions, and labor resistance to any large stake sales can't be discounted. And despite the coalition government's comfortable majority in the Parliament, it will still have to contend with political opposition, from both outside and within the coalition.

Local media recently cited a leader at the Trinamool Congress -- a key member of the ruling coalition and the party that led local farmers against the Nano small-car factory in West Bengal state last year, which ultimately forced Tata Motors
TTM, -0.23%TENK
to take the plant to another state -- voicing opposition to disinvestment.

Even if the government prevails over any resistance, the treatment given to the proceeds of disinvestment will be closely watched. Several commentators are opposed to the government using disinvestment proceeds as a tool to narrow the country's fiscal deficit.

In its previous term, the UPA coalition had, at the insistence of its Communist party allies, created a special fund for disinvestment proceeds that could only be used only for investments in social-welfare projects and to inject capital into other needy state-run firms. Reports last week said the government was likely to amend a rule that would allow it to use the funds raised from disinvestment for other purposes.

Consolidating disinvestment proceeds with federal funds could be a sensitive issue, and the government will need to tread carefully to impress that the money so raised will be earmarked for socially beneficial or productive causes.

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